What signs do you need to look out for?
The latest GDP figures from the Office of National Statistics showed that economic growth was flat for the last quarter of 2022 so technically the UK has avoided a recession – but what is meant by a recession?
Darren Morgan, ONS Director of Economic Statistics told their Statistically Speaking podcast that “a technical recession is widely regarded as two consecutive quarters of negative growth. You could get a -0.1% or +0.1% change, but how different really was the economy at that point in time? I would say it was broadly flat, but some people do get excited about it.
ONS Chief Economist Grant Fitzner added: “The common sense understanding of a recession is a prolonged and significant downturn in economic activity. So not just one or two quarters, and not just a 0.1% change but actually something a bit more substantial.”
Regardless of technical definitions, this doesn’t mean that it will feel any different from a recession however for most business owners and directors.
The last official recession in the UK was during the first two quarters of 2020 when the Covid-19 pandemic and lockdowns were the dominant factors.
Unlike most usual recessions, the worst effects of this were offset by the £370 billion of government business support packages ranging from the furlough scheme to bounce back loan borrowing – which is still in the process of being repaid by thousands of companies.
If the UK economy continues to stagnate in 2023 or does fall into recession as is more widely predicted then what can directors expect?
The first point to note is that corporate insolvencies have been rising for the past few months and are now well above both their corresponding monthly total from 12 months ago and their pre-pandemic equivalents in 2019 and 2020.
The Office of Budget Responsibility (OBR) has forecast that the UK economy will contract by 1.4% over the course of the year and could be in recession for three of the four quarters remaining below its pre-pandemic level of activity until the end of 2024.
Inflation remains stubbornly high and near its 40 year peak despite the Bank of England continuing to raise interest rates to counter the effects and despite it being forecast to shrink by half by the end of the year. This would be due to improvements in the Ukraine conflict and improvements in persistent supply chain issues such as China resuming production after government imposed Covid shutdowns.
Which all might be very well and exactly what you might have heard in the news headlines recently but what will this all mean for you and your business?
Early warning signs
There are some early warning signs to look out for that will let you know how challenging the external environment will become for you and your customers:
- Reduced consumer spending
One sure sign that a recession is taking place is when there is a noticeable reduction in consumer spending across the board, not just on your balance sheet.
- Increased competition
Some competitors will react quicker than others and initiate measures to offset the reduced spending such as promotions, sales and other measures to bolster falling sales. This could have an immediate effect on your business so being aware that this is taking place is essential – as well as planning your own pre-emptive promotional activities.
- Tightening credit and lending conditions
Traditionally during recessions, banks and other lenders batten down their own hatches first which means tightening their lending criteria, making it harder for business borrowers to access additional finance.
It’s sensible to explore potential alternative funding options before a recession arrives and being reassured about the status of existing borrowing facilities by contacting your lender and asking about their range of support. It could even be possible to arrange a new and cheaper borrowing facility depending on circumstances.
- Weakening government support
While there will be some support measures available for businesses, they will not be anywhere like as generous or as widespread as the Covid support programs launched during the last recession in 2020.
One example is the end of the Business Energy Support Scheme at the end of March which will be replaced with a more targeted and overall less generous scheme.
Be aware of this in case you are relying on equivalent support being made available over the next 12 months because you should be making alternative plans now if possible.
- Decreasing economic activity
In recessions, overall economic activity tends to slow down with customers making less purchases and businesses cutting back their own expenditure from suppliers as a result.
This all produces a negative ripple effect especially for small businesses so they need to factor in a sudden and/or gradual reduction in demand into their cash flow forecasts and business models to work out in advance what this could mean for them before it actually happens.
Chris Horner, insolvency director with BusinessRescueExpert thinks that while businesses should be prepared for a challenging 2023, with the right strategy and planning, they could not only survive but eventually thrive during tougher economic times.
He said: “Companies are already struggling to deal with everything that is coming at them right now.
“High inflation is affecting everything from consumer demand with all its knock-on effects to specific sectors such as retail and construction which are particularly exposed to rising costs on raw materials, energy and labour.
“Interest rates might continue to rise too which will increase costs to businesses.
“While the last recession was in 2020, it was unlike most others because of the wide and generous support network. That won’t be there this time so for many directors and business owners, this might be the first recession they face under usual circumstances – which will be a shock.
“A lot of companies are seeing their current borrowing and financial arrangements coming to an end and will have to refinance them under the new, higher interest rates which will be a real challenge for many, especially SMEs if they already have existing debts such as bounce back loans to service.
“There is also the issue of how creditors including HMRC are going to react to debt and repayments.
“Winding up petitions are already increasing as they become more aggressive in chasing outstanding arrears and if these increase then it’s logical to assume that their attempts to recoup debt will also increase in intensity.
“The time to make back-up plans and alternative arrangements is now – before real financial bad news arrives.”
Being forewarned is forearmed – but only to a point.
If you don’t act on the information you’ve got then you will be just as vulnerable when difficulties arise as a business which didn’t have any prior warning.
Once they get a better understanding of your unique circumstances then they will be able to give you specific options you could follow to strengthen your situation and make 2023 a launchpad for a better future – not a sticky swamp to hold you back.